The bond or fixed income market is yet to reach its peak with institutional investors and big players being the only ones to access its benefits. Olushola Bello examines measures that are being put in place by regulators in the Nigerian capital market to ensure that retail bond allows small players and also increases the liquidity in the bond market
One of the most profound Nigerian capital market initiatives this year is the liberalisation of the bond market and with the imminent introduction of varieties of debt instruments by the Debt Management Office (DMO), Securities and Exchange Commission (SEC), Nigerian Stock Exchange (NSE) and floating of bonds by International Finance Corporation (IFC), a member of the World Bank Group had helped in deepening the bond market.
A bond is a debt security (loan) issued by a government, governmental agency, or a corporation. It is basically an "I Owe You" (IOU) issued by one party to another. The bondholders (or investors) are the lenders, and the issuer is the borrower. The borrower promises to make periodic interest payments (coupon) as well as repay the original loan (principal) to bond holder on a stipulated date in the future referred to as the maturity date. The amount of income a bond generates each year is fixed and will not change for any reason - that is why bonds are called fixed income securities.
Until now, the bond market was mainly accessible to the institutional, corporate and high net-worth individuals through the Over The Counter (OTC) market. With the introduction of the fixed income market, investors now have access to the bond market through their broker/ dealer via the Exchange automated trading platform.
It is on record that government bonds were the first securities that were traded on the Nigerian Stock Exchange (NSE) in 1961 and bonds continued to play a key role in the market for more than two decades until the federal government pulled out of bond issuance in 1987. It is interesting to note that since the first reissuance of bonds in 2003, the DMO has raised trillions of naira for the financing of public projects and the revival of the Federal Government of Nigeria (FGN) bond market has raised the appetite of state governments to raise funds via bond issuance.
The economic environment in Nigeria is sophisticated and suitable to create a sustainable vibrant bond market that can be vital in economic development. The success of the bond market depends on the collaboration between the market operators and financial institutions including the Central Bank of Nigeria (CBN). The Municipal Securities Rulemaking Board (MSRB), Debt Management Office (DMO), Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) must ensure that regulated bond trading operations in a shadow and little understood repo-market (repurchase agreements) is protected against illicit operations.
In a bid to broaden and deepen the Nigerian capital market, the Nigerian Stock Exchange (NSE) came up with the retail bonds market which was launched on February 1, 2013. The retail bond market is to be complementary to OTC market. The OTC market is very institutional, the ticket prices are bigger and the initiative of the retail market is to bring retail participants into the fixed income market.
Before now, the Exchange was only offering trading on bonds that are on the Daily Official List and covers the Federal Government of Nigeria (FGN), States and corporate bonds. The retail bond market is expected to drive the activities in the primary market, especially from the corporate aspect now that they know that they can actually participate from a retail perspective on the floor of the Exchange.
The exchange has also identified Fixed Income Market Makers (FIMM), who would constantly provide a two-way quote, as critical to the success of the platform. FIMM is a platform that allows debt market participants to trade NSE-listed debt instruments issued by the federal and state governments or corporations on a transparent order book with firm orders.
The objective of FIMM is to provide liquidity and transparency through an order book with firm orders, pre and post-trade reporting, clearing and settlement solutions. The Exchange also unveiled six stockbroking firms as Fixed Income Market Makers which are: Capital Bancorp, Cordros Capital, ESS/Dunn Loren Merrifield, FSDH and Greenwich Securities.
Market watchers are hopeful that the new initiative will actually drive the activities in the primary market, especially from the corporates now that they know that they can actually participate, from a retail perspective, on the floor of the Exchange.
Commenting recently at a workshop on 'Retail Bonds Trading and Fixed Income Market Making,' the Chief Executive Officer of the NSE, Mr. Oscar Onyema, noted that the exchange has consistently communicated its objective of broadening and deepening the Nigerian capital market and the development of the Retail Bond Market is clearly in line with this objective.
"While we see this as a remarkable milestone, we are well aware that the bond market largely remains a playing field for institutional investors and high net-worth individuals with little retail participation and this presents a clear opportunity to broaden and deepen the capital market." Onyema explained that the retail bond market "is not set up to compete with the OTC (Over the counter) market, but rather complement the structure by opening up participation in the bond space to retail investors who otherwise would have been excluded, as well as institutional investors with a preference for a transparent trading pattern."
Government bond paving way for corporate bodies
Recently at the retreat for members of Financial Correspondents Association of Nigeria (FICAN) held in Lagos, the Director-General, Dr. Abraham Nwankwo, while focusing on the domestic and external debt market, said that the office would further deepen the federal government bond market for enhanced liquidity through the continued issuance of benchmark bonds and introduction of other varieties of debt instruments such as, Securities Lending, Bond Switches and Inflation-Linked Bonds into the domestic bond market.
He pointed out that the office will also strengthen the country's presence in the International Capital market (ICM) through the issuance of other variety of debt instruments, such as the already approved N80billion federal government bonds in the form of Global Depository Notes (GDN) and $100million Nigerian Diaspora Bond.
He encouraged more Nigerian corporates to leverage on the existing sovereign benchmark to raise long-term capital in the domestic market and International Capital Market to develop the real sector and build infrastructure. He disclosed that the domestic debt market attracted a whooping of $5.112billion from foreign investors' holdings in federal government securities at the end of December 2012, compared to $500million as at end-January of same year.
According to Nwankwo, the domestic debt market has over the years recorded increase in foreign investors' participation especially in government securities. Foreign investors which accounted for near zero percent of bond holding in the first quarter of 2011 increased their holding to 19.52 per cent as at the end of 2012.
He stated that with the historic Paris and London Club exit, the Office had continued to explore the domestic debt management strategy to raise finance in meeting government's borrowing needs at prudent degree of risks. The DG said the debt office worked to establish a viable competitive presence in the international capital market via its debut offer of $500 million 10-year 6.75 per cent Sovereign Eurobond issuance, closely followed by the successful issuance of a $1billion dual-tranche bond offered in July, 2013.
Nwankwo noted that massive opportunities have been created for the private sector for raising long-term debt instruments for long-term investment in real sector, infrastructure and development of finance industry, even as some of these firms have leveraged on these opportunities in both domestic bond market and international capital market.
"In response to the favorable domestic market environment created, 20 Nigerian Corporates have raised long-term capital for over N200billion from the domestic debt market between 2005 and 2012 to fund development of the real sector. Opportunities exist for growth in terms of number and diversity of debt issuers, range of instruments, size and investor base", her said.
Nwankwo emphasized that four Nigeria banks namely Guaranty Trust Bank, Access Bank, Fidelity Bank and First Bank have taken advantage to issue $1.45billion between January, 2011 and July, 2013 from the international capital market.
SEC's Move to Deepen Bond Market
The Securities and Exchange Commission and International Finance Corporation early this month at the Nigerian Debt Capital Markets Conference came out with plans to deepen Nigeria's debt markets. The Director General, SEC, Arunma Oteh during the event said the commission had spearheaded a number of reforms to accelerate the development of Nigeria's domestic capital markets.
Oteh said SEC's key reform initiatives include enhancing the framework for bond issuance, developing rules on book building and shelf registration, pushing for revision of the tax regime to eliminate tax discrimination between investors in sovereign bonds and those who invest in corporate or sub-national bonds as well as simplifying disclosure rules for fixed income have created the right environment for more issuances by corporates.
She noted that there were more corporate bond issuances in 2011 than in any other year in Nigeria's history and hoped the conference will help sustain the momentum and encourage more issuances to further deepen our domestic bond market.
However, the IFC has shown interest in deepening the Nigerian domestic bond market by issuing a $50million naira-denominated bond called Naija Bond in February 2013 and planning to float its first long-term, local-currency bond programme of about $1 billion in Nigeria. According to the DG of DMO, "The $50million naira-denominated bond raised in February 2013 by IFC has established a benchmark for other international bond issuers to tap the growing naira bond market," DMO DG explained.
Capital market analysts are of the view that the liberalisation of the Bond Market is a good development to the capital market as a whole. David Adonri CEO of Lambeth Trust Limited said that with the reactivation of the Bonds platform on The NSE last year, activities on the platform have continued to gather momentum.
He added that retail investors now have access to risk free fixed income securities on the NSE, adding that it is once more possible to shift financial assets from Equities to Bonds seamlessly. "With the Market Making mechanism fully entrenched in the Bonds Market, activities will grow further when more retail investors become aware of the advantages of investing in bonds", Adonri said.
The Managing Director of APT Securities & Funds Limited, Alhaji Kasimu Garba Kurfi said that in the first half of the year the bond market was very active due to the inflation rate going down. He pointed out that with the new CBN policy decision to apply 50 per cent of Cash Reserve Requirement (CRR) to all government deposits with commercial banks making the Nigeria Interbank Offer Rate (NIBOR) around 18 per cent which is having a reverse negative impact on the bond market as the yield of the bond market dropping to around 13 per cent.
He stated that the DMO about five months ago appointed Stanbic IBTC as the market dealer for Federal Government Bond for the retail investors who want to buy small quantity to hold.
He noted that although the platform has been active as expected, the market regulators should create awareness and educate the local investors on the benefit of investing in the bond market.
Speaking also, the Managing Director of Laksworth Investments & Securities Limited, Kayode Awotile said that the market crash of 2008 was of benefit to the bond market. There has been a considerable growth in volume and value traded since then, and the market has continued to grow as risk appetite and confidence in the equities market remain low.
He noted that the turnover for the three and five -year tenor bonds has been at 56 per cent and 40 per cent, respectively. Other key drivers of growth are the high interest rate regime (the average coupon rate on FGN bond is 12 per cent) and government's continued financing of deficit using local debt.
He, however, noted that analysts are worried by governments' dominance in the bonds market - Federal Government and State Government bonds, for instance, account for over 70 per cent of issues.
He added that the combination of high volume of government bonds and high coupon rate will likely stifle activities on corporate bonds and deny businesses much needed capital for expansion and growth. However, for a market still in its infancy, policies and initiatives will continue to be fine-tuned in such a manner that the entire spectrum of the capital market benefits all stakeholders.